8/10/2019 Day15 Upload

1/7

11/21/20

IAPM

PGP17

1

Portf Manag Tools(Nov19)

DifficultieswithProtectivePuts

Notraded utsontheshareswewishtoinsure

Portf insuranceonamorecomplicatedbasketofassets

Putsareavailable,butnotwiththerequiredstrike/expiry

2

8/10/2019 Day15 Upload

2/7

8/10/2019 Day15 Upload

3/7

11/21/20

Thusbu in aPutise uivalentto

investing PV(K)xN(d2) inariskfreeasset

plus

investingS0N(d1)inthestock.

theoption

5

Useofthisinmanagingaportfolio

If ouwanttobu as ecific ortfolioofassetsandandaninsurancepolicyguaranteeingthatyourtotalinvestmentwillnotbeworthlessthanK,youcanachievethisbyinvestingacertainproportionintheportfolioandtheremaininginriskfreeassets.

6

8/10/2019 Day15 Upload

4/7

11/21/20

Su ose oudecidetoinvest 1000inNFYstock(currentlysellingatRs.56)andinprotectiveputsofthestockwithanexercisepriceofRs.50,foraoneyearperiod.

The stock pays no dividends; you are hoping for a large capitalgain at the end of the year, but you want to guard against

SupposethatthereisnotradedputonNFY,howdo

youimplement

atrading

strategy

that

will

be

approx

equivalenttotheprotectiveput?

7

PRNG Pseudo

Random

Number

Generators WhatgoesbehindRAND()PRNG

seu o-ran om num ers

Whatistheseedofarandomnumber?

Considerthis: Midsquaremethod(oneoftheearliestPRNG)

Xo=0.9876Xo^2=0.97535376

X1

=0.5353X1^2=0.28654609

X2=0.6546

X0istheseedofthisRandomnumbergenerator.

8

8/10/2019 Day15 Upload

5/7

11/21/20

PortfolioPerformanceEvaluation(Nov20)

9

AdjustingReturnsforRisk

Thesim lestandmostpopularwaytoadjustreturnsforriskistocomparetheportfoliosreturnwiththereturnsonacomparison

orportfolioswithsimilarriskcharacteristics)

10

8/10/2019 Day15 Upload

6/7

11/21/20

IsQ

better

than

P?

Should I transfer some of my funds from P to Q?

11

WhichMeasureisAppropriate?Itde endsoninvestmentassum tions

1)Iftheportfoliorepresentstheentireriskyinvestment,thenusetheSharpemeasure.

2)Iftheportfolioisoneofmanycombinedintoalargerinvestmentfund,usetheJensen ortheTreynor measure.TheTreynor measureisappealingbecauseitweighsexcess

returnsaga nst

systemat c

r s .

12

8/10/2019 Day15 Upload

7/7